Myth or reality: debating long waves: Review

The Credit Crunch – a Marxist analysis Richard Brenner and
Michael Probsting: Review

This special issue of the League for the Fifth International’s (LFI) journal consists of a collection of articles on the unfolding credit crunch written over the last year or so, an article on Marx’s theory of capitalist crisis, one on the relevance of Lenin’s theory of imperialism and a polemic aimed at this magazine, attacking its analysis of the credit crunch and its view of the extended period of capitalist growth since the early 1990s.

At its 2003 International Congress the LFI confirmed its belief that world capitalism was mired in stagnation – at the start of what proved to be the strongest five years of growth experienced by the world economy in 40 years.

The credit crunch however has put wind in their sails. The worst financial crisis to hit the developed imperialist economies (or at least the Anglo-Saxon ones) in 60 years is testing the strength and durability of a long upward period of global capitalist growth. Will the economic reserves of imperialism, timely government interventions and the continued dynamism of the Asian, Latin American and ex-USSR regions help overcome this crisis; or will the pricking of the property bubble and enforced saving by western households precipitate a global recession, or at least decisively end the above-trend economic growth world capitalism of the last period?

In the final article in this collection Richard Brenner seeks to refute the theoretical underpinning of this magazine’s analysis of the long upward wave of capitalist growth since the early-to-mid 1990s.

In several passages Brenner argues that Permanent Revolution did not foresee the credit crunch and now under-estimates its impact on the global economy. He suggests that the financial crisis’ very appearance is a body blow to the idea that world capitalism has been enjoying a long upward curve of development.

It is true that we – along with everyone else bourgeois or Marxist – failed to foresee the specific form the financial crisis would take (i.e. the sub-prime mortgage crisis hitting banks holding securitised assets). But the view that the housing market in the US, UK and parts of Europe were in the throes of a bubble that would burst sooner or later, was commonly held among most observers.

We shall return to what impact it is having later, but that its very appearance refutes the notion that capitalism is in an ascendant phase is palpable nonsense.

The 1994 Mexican peso crisis, the Asian financial crisis of 1997-98, the dotcom crash on Wall Street in 2000, the collapse of the Argentine economy in 2001 and now the credit crunch, have all been examples of the destabilising and destructive effect of financial capital flows. Through all these crises (leaving aside the current one, which we are in the middle of) world growth was checked and then continued its upward curve.

The unchecked expansion of forms of credit, the unregulated growth of foreign exchange transaction and short-term capital flows across borders, and the wild speculative investments made in shares, property or commodities – these are meat and drink to capitalism in the modern era of globalisation of the last 30 years
or so.

They normally occur after a period of rapid capitalist expansion in which excess profits and new forms of fictitious capital pile into one favoured class of assets, producing a bubble that eventually bursts. In 1907 one of the greatest system-threatening banking collapses ever, took place in the USA (eventually giving rise to the creation of the Federal Reserve), causing a recession. But it took place, as have the financial crises of the last 15 years, in the middle of a long wave of capitalist expansion lasting from 1895 to the First
World War.

The financial crises of the current era are notable for the fact that such crises are more likely to spread from their point of origin outwards, are more varied and more destabilising because of the massive growth of financial capital in relation to the “real economy”. Clearly this present financial crisis, centred as it is not in the Third World but in the heart of the imperialist financial system, contains a more systemic threat than say the Asian crisis 10 years ago. But is the unfolding of the credit crunch leading to such a general collapse (like the 1930s) or a more modest decline together with a realignment of economic power?

The south east Asian crisis (and its delayed effects in Latin America) was an opportunity for the G7 countries to organise a fire sale of assets and enrich their corporations. This crisis is allowing emerging centres of financial wealth in Asia and the Middle East to enlarge their wealth and power within the global system, the full effect of which will only be observable in the next phase of
the cycle.

Will the financial system (and in its wake trade and investment) implode under the impact of the credit crunch? Or will the world economy resume its above-trend growth of recent years after taking a relatively minor hit in some parts of the EU and the USA, as it did in 2000-02?

If the recessionary fall-out of the credit crunch (in terms of jobs and output lost, bankruptcies, decline in overseas investment etc) is in the same ball park as seven or eight years ago and much less than the 1970s and 1980s, or even early 1990s, then it will tend to confirm, as with 1907, that the underlying dynamism of the global economy has acted to contain the damage.

The thrust of Brenner’s attack is aimed at challenging our view of this underlying dynamism. At first glance it appears a non-argument. He concedes much of our case:

“To be fair to Jeffries and Harvey . . . they have pointed to a major world-historic turning point altering the composition of capital.” (p133) He summarises in several places the combination of socio-economic factors we have pointed to that lay behind the extended upturn and says he agrees with them, and even that they have resulted in “strong booms and weak downturn phases in the USA and Britain between 1993 and 2007.” (p137). He accepts the fact of the unprecedented expansion of capitalism in China and the ex-USSR.

His objection is rather to the theoretical framework in which these facts are embedded. He argues that “long wave theory” originated by Kondratiev, rejected by Trotsky and (in Brenner’s opinion) revived and given a Marxist gloss by Ernest Mandel, is schematic. This is because Kondratiev’s theory insists a priori that upward and downward extended cycles (comprising of several industrial cycles) of capitalist development have to be comprised of roughly 50 years, roughly equally divided into periods of 25 years each.

Whereas the roughly 7-10 year industrial cycle does have an internal temporal dynamic governed by the replacement and wearing of fixed capital investments, there is no such dynamic to long waves, either in the up or down phases, governed as they are by broad-scale, unpredictable socio-economic events such as war or revolutions. Hence the long upward phase opened up in the early 1990s has no logical reason to last for 25 years.

To be fair to Mandel, his work was mainly retrospective and Brenner does not challenge his view that the post-1815 world economy can indeed be divided up into these long 50-year periods up to the end of the long boom (1973); or does Brenner consider this chronology to be a schematic post-festum imposition on real history? Or do they indeed correspond to real historical periods, as Mandel and we agree?

Mandel did have the merit of predicting the end of the long boom a few years before it happened, based on his analysis (proof of the pudding etc?). But he refrained from predicting that the post-1973 downturn would end 25 years or thereabouts later, although he did sketch out some socio-economic conditions (á la Trotsky) that may combine to bring it to an end at some point.

What of Permanent Revolution? We share Mandel’s view (and Trotsky’s) that broad socio-historic factors lie behind the beginning of an upward phase. And so it appears does Brenner. But we also agree with Mandel that the end of a long upward phase occurs when the internal dynamics that have given rise to the above-trend rise in profitability (and hence broad expansion) whither away (or put another way, when the tendency for the rate of profit to fall reasserts itself over the countervailing tendencies).

We do not believe the upward phase has to last 25 years. We have tried to focus our analysis on the key internal (to the accumulation process) effects of the socio-economic transformation brought about by the collapse of the planned economies of China and the USSR (and the breaking down of barriers to India’s, Brazil’s and other major semi-colonies’ insertion into the global economy). Above all there has been the qualitative lowering of the organic composition of capital (OCC) in these states and a subsequent rise in profitability. In other words the incorporation of the 800 million- strong Chinese (low paid) workforce (larger than that of the EU, Japan and USA combined) into the world market has qualitatively boosted global capitalism.

We have argued that this lowering of the OCC will fall away over time, and the single biggest element in this process is the erosion of the surplus labour force in China, which will raise the OCC by pushing wages in China and elsewhere up.

Brenner believes that we have plucked the timescale this is projected to happen (around 2015) out of our head in order to conform to our a priori prejudice that an early 1990s start date for a long upward wave must end then.

But the matter of the transformations in the Chinese labour force is a matter of ongoing research and debate. Reflecting the current consensus, The Economist says the working age population rose 1.3% a year between 1996-2005. From then until 2015 it will do so at 0.7% per year and then shrink by 0.5% a year until 2025. At the same time the productivity lift will end as the shift from the land to the cities dwindles. However, one Chinese academic study suggests that by 2009 there would be widespread labour shortage, based on revising surplus labour estimates from 150-200 million to zero because of what kind of labour firms really want. Yet another study by Standard Chartered argues the number of 20-somethings are rising again and will increase by one-third up to 2015, easing wage pressure.

It is the temporal dynamics of these world-historic shifts in the global labour force that underpin our analysis.

Brenner objects to this and says it is our “core error”. (p134) He rejects the idea that this verifiable shift in the OCC affects more than just China’s profits. First, because while importing cheap components from Asia to be used in US industry raises the latters’ superprofits, it does not lower the OCC of US production. Correct, but the OCC of US-owned production in China is directly lowered by this process, accounting for an increasing amount of US manufacturing capital; moreover, the OCC of US domestic capital is lowered by the process of keeping wages inside the USA stagnant or falling because of the pressure on US wages as a result of competition from abroad.

Brenner indeed accepts this: “Certainly for a time the associated effects of importing cheap goods and lowering the value of constant and variable capital in the west operated as countervailing tendencies to crisis.” He just believes that this effect ended as Chinese inflation took off in 2007.

But it is not wage costs in the first instance that explain the rise in Chinese or global inflation, but the effect of rampant capitalist expansion on the global price of energy, raw materials and food. What is cyclical and structural in these increases remains to be seen, but it is clear that the downward pressure on global OCC from cheap Chinese labour has far from ended.

While we do not see eye to eye on this analysis it will not have escaped the attention of the attentive reader that having started out with a critique of our long wave theory for insisting on a temporal, wearing out explanation for the decline of the expansive phase of capitalist development, Brenner ends up contesting us on precisely this terrain; namely, whether and to what degree and over what time-scale the countervailing tendencies that have boosted accumulation and the rate of profit, cease to have an effect. He obviously wants to have his cake and eat it.

Brenner ends with an exposition of the LFI’s take on the period, which can be summarised as saying that while there has been rapid, world-historic changes in the world economy after 1993 and as a result massive capitalist expansion in Asia, this has not been enough to “break free from the structural over-accumulation of capital and associated tendency to stagnation of productive labour that afflicted it in the 1973-90 period.” (p137)

Concretely, he asserts that the growth rates in the US and Europe still exhibit a tendency towards stagnation and that the growth in Asia etc, does not compensate for that, ensuring that the 1992-2007 phase is “not an expansionary period characterised by a predominant trend towards the development of the productive forces worldwide.”

Even if we were to allow for his partial and inaccurate picture of generalised over-accumulation and stagnation inside the G7, Brenner is blind to the fact that the rapid capitalist accumulation of capital in Asia – in the first instance under the spur of imperialist investment – is shifting the centre of gravity of capitalist production away from the metropolitan centres towards the old second and third world, and that the combined effect of this shift – on a global scale – has to date been to increase output, profits and productivity per head significantly above those of the pre-1992 period.

Brenner thinks he has refuted long wave theory: in fact he demonstrates his lack of understanding of it – a lack of comprehension brought on by a bad case of catastrophism.

Tue 02, December 2008 @ 17:53